–
Ensure
that the project is completed within budget
–
Concerned
with cost of resources needed to complete activities; consider effect of
project decisions on cost of using product “life-cycle costing”
(Click
above for PMBOK4 Article)
–
Most
prospective financial impact of using the product is outside the project scope
–
Consider
information needs of stakeholders, controllable and uncontrollable costs
(budget separately for reward and recognition systems)
–
Estimating
should be based on WBS to improve accuracy
–
Estimating
should be done by the person performing the work
–
Having
historical records is key to improving estimates
–
Costs
(schedule, scope, resources) should be managed to estimates
–
A
cost (schedule, scope, baseline) should be kept and not changed
–
Plans
should be revised as necessary during completion of work
–
Corrective
action should be taken when cost problems (schedule, scope and resources)
occur.
•
Resource
Planning:
–
Determining
what physical resources and quantities are needed to perform work
•
Inputs
to Resource Planning:
–
Work
Breakdown Structure
–
Historical
Information
–
Scope
Statement – justification & objectives
–
Resource
Pool Description – what resources are potentially available for resource planning
–
Organizational
Policies – staffing, procurement
–
Work
Breakdown Structure
–
Network
Diagram
–
Schedule
–
Risks
–
Historical
Information
–
Scope
Statement – justification & objectives
–
Resource
Pool Description – what resources are potentially available for resource
planning
–
Organizational
Policies – staffing, procurement
•
Resource
Planning Tools & Techniques
–
Expert
Judgment
–
Alternatives
Identification
•
Resource
Planning Outputs:
–
Resource
Requirements – what type & how many resources are needed for each activity
in the Work Breakdown Structure
•
Cost
Estimating:
–
Develop
approximate costs of resources
–
Distinguish
estimating from pricing
•
Estimating
– likely amount
•
Pricing
– business decision
–
Identify
alternatives and consider realigning costs in phases to their expected savings
•
Cost
Estimating Inputs:
–
Work
Breakdown Structure
–
Resource
Requirements
–
Resource
Rates (if known)
–
Activity
Duration Estimates
–
Historical
Information – (project files, commercial cost databases, team knowledge
–
Chart
Of Accounts – coding structure for accounting; general ledger reporting
•
Cost
Estimating Tools & Techniques
–
Analogous
Estimating – “top down”; using actual costs from previous project as basis for
estimate
•
Reliable
when previous projects are similar and individuals have expertise – form of
expert judgment
–
Parametric
Modeling – uses project characteristics in mathematical models to predict costs
(e.g.building houses)
•
Reliable
when historical information is accurate, parameters are quantifiable, and model
is scalable
•
2
types: Regression analysis, Learning Curve
–
Bottom
Up Estimating – rolling up individual activities into project total – smaller
work activities have more accuracy -
–
Computerized
tools – spreadsheets, software
–
Pro’s
and Con’s
–
Analogous
Estimating
•
Quick - Less Accurate
•
Tasks
don’t need to be identified – Estimates prepared with little detail and
understanding of project
•
Less
costly – Requires considerable experience to do well
•
Gives
PM idea of management expectations – Infighting at high levels of organization
•
Overall
project costs are capped – Difficult for projects with uncertainty
–
Pro’s
and Con’s
–
Bottom
Up Estimating
•
More
Accurate – Takes time and expense
•
Gains
buy-in from the team – Tendency for team to pad estimates
•
Based
on detailed analysis of project – Requires that project be defined and
understood
•
Provides
a basis for monitoring and control – Team infighting to get biggest piece of
pie
•
Outputs
from Cost Estimating
–
Cost
estimates – quantitative assessments of likely costs of resources required to
complete tasks
•
For
all resources of the project (labor, materials, supplies, inflation allowance,
reserve)
•
Expressed
in units of currency
–
Supporting
Detail
•
Description
of scope (reference to the WBS)
•
Documentation
how estimate was developed
•
Indication
of range of possible results
•
Assumptions
–
Cost
Management Plan – how cost variances will be managed
–
Cost
Risk: associated to seller for Fixed Price; associated to buyer for Time and
Materials budget
•
Cost
Budgeting
–
Involves
allocation of total estimate to individual work to establish a cost baseline to
measure performance
•
Cost
Budgeting Inputs
–
Cost
Estimate
–
Work
Breakdown Structure
–
Project
Schedule – includes planned start and finish dates for items costs are
allocated to
•
Needed
to assign costs during the time period when the actual cost will be incurred
•
Cost
Budgeting Tools & Techniques
–
same as Cost Estimating Tools and Techniques
•
Outputs
from Cost Budgeting
–
Cost
Baseline – time phased budget to measure and monitor cost performance
•
Developed
by summing estimated costs by period (S curve of values vs. time)
•
Larger
projects have multiple baselines to measure different aspects of cost
performance
•
Cost
Control
–
Concerned
with influencing factors that create changes to the cost baseline that are
beneficial
–
Determining
that the cost baseline has changed
–
Managing
actual changes as they occur
•
Monitor
cost performance to detect variances
•
Record
all appropriate changes accurately in the cost baseline
•
Preventing
incorrect, unauthorized changes being included in the cost baseline
•
Informing
stakeholders of authorized changes
•
Determine
the “why’s” of positive and negative variances
•
Integrated
will all other control processes (scope, change, schedule, quality)
•
Inputs
to Cost Control
–
Cost
Baseline
–
Performance
Reports – meet, exceed budget
•
50/50
Rule – task is considered 50% complete when it begins and gets credit for
remainder 50% only when completed
•
20/80
Rule - task is considered 20% complete when it begins and gets credit for remainder
80% only when completed
•
0/100
Rule – task only credited when fully completed
–
Change
Requests
–
Cost
Management Plan
•
Tools
& Techniques of Cost Control
–
Cost
Change Control System – defines the procedures by which the cost baseline may
be changed
–
Performance
Measurement – assess magnitude of cost variations (Earned Value Analysis) and
what is causing the variance
–
Additional
Planning – examine alternatives
–
Computerized
Tools – forecast planned costs, track actual costs, forecast effect of cost
changes
•
Cost
Control Outputs
–
Revised
Cost Estimate
•
Modifications
to cost information; require stakeholder approval and adjustments to other
project areas
–
Budget
Updates – changes to approved cost baseline; revised in response to scope
changes
–
Corrective
Action
–
Estimate
at completion – (EAC) – forecast of total expenditures
•
Actual
to date plus remaining budget modified by a factor (cost performance index)
•
Current
variances are seen to apply to future variances
•
Actual
to date plus new estimate for remaining work
•
Original
estimates are flawed, or no longer relevant
•
Actual
to date plus remaining budget
•
Current
variances are typical and similar variances will not occur in the future
–
Lessons
Learned
•
Earned
Value Analysis
–
Integrates
cost, schedule and scope
–
Better
that comparing projected vs. actual because time and cost are analyzed
separately
–
Terms:
•
BCWS
– Budgeted Cost of Work Scheduled (how much work should be done)
•
BCWP
– Budgeted Cost of Work Performed a.k.a. Earned Value (how much work is
budgeted, how much did we budget)
•
ACWP
– Actual Cost of Work Performed (how much did the completed work cost)
–
Terms:
•
BAC
– Budget at Completion (how much did you budget for the total job)
•
EAC
– Estimate at Completion (what do we expect the total project to cost)
•
ETC
– Estimate to Completion (how much more do we expect to spend to finish the
job)
•
VAC
– Variance at Completion (how much over/under budget do we expect to be)
–
Formulas
•
Variance
(Plan – Actual)
•
Cost
Variance (CV): BCWP – ACWP; negative is over budget
•
Schedule
Variance (SV): BCWP – BCWS; negative is behind schedule
•
Cost
Performance Index (CPI): BCWP
ACWP
•
I
am only getting x¢ out of every $
–
Formulas
•
Schedule
Performance Index (SPI): BCWP
BCWS
–
I
am only progressing x % of the planned rate
•
Estimate
at Completion (EAC): BAC
CPI
–
As
of now we expect the total project to cost x$
•
Estimate
to Complete (ETC): EAC – ACWP; how much will it cost from now to completion
•
Variance
at Completion: BAC – EAC; when the project is over how much more or less did we
spend (most common way of calculating EVA
–
BCWP
comes first in most formulas
–
If
it is a variance, BCWP comes first
–
If
it is an index, BCWP is divided by
–
If
the formula relates to cost, use AWCP
–
If
the formula related to schedule, use BWCP
–
Negative
is bad; positive results are good
–
ETC
refers to “this point on”; EAC refers to when job is completed
–
Accuracy
of Estimates
–
Order
of Magnitude Estimate: -25% - 75%; usually made during Initiation Phase
–
Budget
Estimate: -10% - 25%; usually made during the Planning phase
–
Definitive
Estimate: -5% - 10%; usually made during the Planning phase
–
Accounting
Standards
–
Not
usually part of the exam
–
Present
Value (value today of future cash flows):
•
PV
= FV
(1 + r) N
FV
= Future Value
R
= Interest Rate
N
= Number of time periods
–
Net
Present Value: total benefits (income or revenue) less the costs. NPV is the
sum of each present value of each income/revenue item
–
Internal
Rate of Return (IRR): company may select project based on highest IRR
–
Payback
Period: number of time periods it takes to recover the investment in the
project before generating revenues
–
Benefit
Cost Ratio (BCR): compares costs to the benefits of different projects
•
Greater
than 1 means benefits are greater than costs
•
Less
than 1 means costs are greater than benefits
–
Opportunity
Cost: opportunity given up by selecting one project over another
–
Sunk
Costs: expended costs. Sunk costs should not be considered when determining to
continue with a troubled project
–
Law
of Diminishing Returns: the more that is put in the less of an outcome is
received
–
Working
Capital: current assets – current liabilities
–
Variable
Cost: costs that change with the amount of production or the amount of work
(materials, wages)
–
Fixed
Cost: non-recurring costs that do not change
–
Direct
Cost: directly attributable to project work (travel, wages, materials)
–
Indirect
Cost: overhead items or costs for the benefit of more than one project (taxes,
fringe benefits)
–
Depreciation:
assets lose value over time
•
Straight
Line depreciation: same amount is taken each year
•
Accelerated
Depreciation: 2 forms
•
Double
Declining Balance
•
Sum
of the Years Digits
–
Life
Cycle Costing: includes operations and maintenance phases
–
Value
Analysis: find a less costly way to do same work
–
Make
or Buy decisions –at Development (Planning) phase, not conceptual phase
–
Project
Objectives – are not necessarily needed to fund project
–
Project
Definition – focus on end product initially; costs and benefits will be
evaluated later
–
25%
of project lifecycle expended at end of planning
–
No
guarantees; only most likely results
–
Line
of Balance charts are used for manufacturing
–
Negative
Float – the late start date is earlier than the early start date
–
Value
Engineering/analysis – does not trade performance for cost
–
Prospectus
– profitability and technical feasibility used to solicit funding
–
Definitive
Estimate –most precise/accurate estimate for determining project costs
–
Management
Reserve – over time PM wants no change to reserve; customers wants $ back
–
Cost
and Schedule Data – predicts future performance
–
ROI,
Nest Present Value and Discounted Cash Flow – all can be used to measure total
income vs. total $ expended
–
Undistributed
budget – budget that contains approved scope changes but are not planned yet
–
Depreciation
is not a measurement of profitability
–
Pay
Back Period - # of periods required to recover the initial investment
